Procedure 7.5.1 Local Cash and Investments

Part 1. Authority. It is the policy of the Board of Trustees that each university and college follow the guidelines listed below when investing local funds.

Part 2. Objective. To establish standards for universities and colleges when investing local funds not managed by the State Board of Investment (SBI).

Part 3. Definitions.

Cash and cash equivalents - Cash and short-term, highly liquid investments with an original maturity of three months or less.

Investments - Interest bearing vehicles with varying lengths of maturity; not as liquid as cash and cash equivalents.

Certificates of deposit (CDs) - A certificate issued by a bank that shows a specific amount of money has been deposited at the issuing institution. The CD bears a specific maturity date, interest rate, and denomination.

Money market mutual fund - Mutual funds that invest in short-term debt instruments. They provide the benefit of pooled investments, as investors can participate in a more diverse and high-quality portfolio than they otherwise could individually. And like other mutual funds, each investor who invests in a money fund is considered a shareholder of the investment pool, a part-owner of the fund.

Treasury Bills - Short-term obligations of a United States government usually issued for periods of one year or less. Treasury bills do not carry a rate of interest and are issued at a discount on the par value. Treasury bills are repaid at par value on the due date.

Stocks - Certificates representing ownership in a corporation and a claim on the firm's earnings and assets. They may yield dividends and can appreciate or decline in value.

Bonds - Debt securities issued by companies or government entities. Bonds represent promises by the companies or government entities to pay interest at specified rates on specified dates, and to redeem the bonds on a specified date. Bond values typically fall when interest rates rise, and rise when interest rates fall.

Commercial Paper - Debt instruments that are issued by established corporations to meet short-term financing needs. Such instruments are unsecured and usually have maturities ranging from 2 to 270 days.

Government National Mortgage Association(GNMA) - Mortgage backed security explicitly guaranteed by the United States Government.

Federal National Mortgage Association (FNMA) - Mortgage backed security implicitly guaranteed by the United States Government.

Custodial Credit Risk - The risk that in the event of a failure of the counterparty, the investor will not be able to recover the value of the investments in the possession of an outside party.

Counterparty - The party that sells investments to the investor.

Credit Risk - The risk that an issuer or other counterparty to an investment will not fulfill its obligations.

Concentration of Credit Risk - The risk of loss attributed to the magnitude of a government's investment in a single issuer.

Interest Rate Risk - The risk that changes in interest rates will adversely affect the fair value of an investment.

Part 4. Monitoring Risk. It is the responsibility of each university and college to manage risk of all local accounts in the following four areas:

Custodial Credit Risk - In addition to following Minnesota Statutes Section 118A.03, every local investment must have full collateral insurance to cover the amount of the deposit or investment. This excludes the use of FDIC insurance and applies to accounts above the $500,000 free Securities Investor Protection Corporation (SIPC) coverage amount for brokerage accounts. Stocks, mutual funds, and obligations explicitly guaranteed by the United States government are excluded from this requirement.

Credit Risk - All investments must comply with Minnesota Statutes Section 118A.04. Obligations of the United States government or obligations explicitly guaranteed by the United States government (GNMAs and Treasury Bills) are not considered to have credit risk and thus do not require disclosure of credit quality. FNMAs and other mortgage backed securities are only implicitly guaranteed by the United States government and thus are exposed to credit risk.

Concentration of Credit Risk - Investments should be diversified by type and issuer to alleviate this risk. Investments issued or explicitly guaranteed by the United States government are excluded from this requirement, as are pooled investments and mutual funds.

Interest Rate Risk - To limit the risk of debt investments, investors should take into consideration fluctuating interest rates and cash flow needs when purchasing short-term and long-term debt investments. Payout rates of interest may be higher for some long-term investments even considering paying a penalty for early withdrawal.

Part 5. Collateral. In accordance with Minnesota Statutes Section 118A.03, all universities and colleges shall obtain collateral for deposit accounts over the Federal Deposit Insurance Coverage (FDIC) limits. For interest-bearing accounts, the FDIC limit is $250,000 until December 31, 2013, after which the insured limit reverts to $100,000. Non-interest bearing accounts participating in the Transaction Account Guarantee Program have unlimited FDIC insurance coverage until June 30, 2010, after which coverage reverts to $100,000. Noninterest-bearing checking accounts include Demand Deposit Accounts (DDAs) and any transaction account that has unlimited withdrawals and that cannot earn interest. Also included are low-interest NOW accounts (NOW accounts that cannot earn more than 0.5% interest). Since the FDIC limits, if any, are by taxpayer ID, the limits apply to all state of Minnesota accounts together, not for each account held by each university or college. Universities and colleges are advised to not rely on FDIC insurance when obtaining collateral. Types of deposit accounts needing collateral coverage include: checking, savings, money markets, and certificates of deposit.

Minnesota Statutes Section 118A.03 requires that the fair value of the collateral be at least 10 percent greater than the amount on deposit. This should be followed throughout the year and monitored regularly by the universities and colleges. In addition, the universities and colleges must have a written assignment of collateral which is an official record of the bank where the collateral was obtained.

Accounts maintained by a brokerage house are insured under the Securities Investor Protection Corporation (SIPC) up to $500,000. Universities and colleges that have accounts in excess of $500,000 with a broker must obtain additional coverage from their broker to cover the entire account balance, for those accounts needing collateral coverage. Investments in government backed securities such as Treasury Bills or GNMAs do not need collateral. Stocks and mutual funds are also excluded.

Part 6. Re-bidding of Banks. Universities and colleges must rebid their local banking institution(s) at a minimum of every 5 years. The request for proposal (RFP) shall include a request for items such as fees, location, services and interest rates. Any situation involving selection of local banking institution(s) on a non-competitive basis must be documented by the university or college and approved by the vice chancellor - chief financial officer or designee. Every effort should be made to obtain competitive bids in response to the RFP.

Part 7. Management Expectations. Universities and colleges shall have an internal procedure for monitoring levels of local cash accounts. The procedure shall address items including investing local funds in various short-term and long-term investment vehicles to obtain the highest yield based on cash flow needs.

Universities and Colleges may establish, in consultation with the student organization, guidelines on appropriate business practices for expenditures from student organization agency accounts. These funds are held in trust for the student organization and are not an asset of the University or College.

07/27/09 - Part 5, FDIC limits updated; Part 6, RFP required for bank selection or selection based on local non-competitive basis must be documented by the university or college and approved by the vice chancellor - chief financial officer or designee